Question

Suppose a firm's business operations are such that they mirror movements in the economy as a whole very closely; that is, the firm's asset beta is 1. Find the equity beta for this firm for debt-equity ratios of O, 1.2, 5.9, and 22. (Do not round intermediate calculations. Round your answers to 1 decimal place, e.g., 32.1.) Debt-Equity Ratio Equity Beta 1.2 5.9 22

Answer 1

Assuming that tax rate, t = 0

Asset Beta = 1

Equity beta = Asset beta *(1+ D/E)

a)

D/E = 0

Equity Beta = 1*(1+0) =1

b)

D/E = 1.2

Equity beta = 1*(1+1.2) = 2.2

c)

D/E = 5.9

Equity beta = 1*(1+5.9) = 6.9

d)

D/E = 22

Equity Beta = 1*(1+ 22) = 23